Developers on shifting ground
CAROLYN IRELAND
Globe and Mail
September 19, 2008 at 12:00 AM EDT
With financial markets roiling, oil and gas prices gyrating and the extent of the fallout in the Canadian real estate market uncertain, many current and aspiring homeowners seem content to stand still and wait out the turmoil.
Home builders don’t have that option.
“This whole industry is a big ship and it doesn’t turn on a dime,” says Niall Haggart, vice-president at Daniels Corp.
Builders and land developers face a battalion of challenges right now: Spillover from the collapse of the U.S. housing market is starting to drag down real estate sales and prices in Canada but no one can predict how long or steep the slide will be.
In Ontario, the government’s official plan to curb urban sprawl is making land available for building scarce and therefore more expensive, developers complain.
At the same time, higher materials costs for builders are also pushing up the cost of even a modest townhouse in the suburbs out of the reach of first-time buyers.
Meanwhile, immigration brings potential new buyers into the housing market just as the looming retirement dates of baby boomers could lead to a wave of downsizing.
Builders buy land several years before they ever have a house or condominium unit ready for a buyer. Many are trying to adjust to the shifting landscape and predict where the market will be a few years out.
This combination of economic factors, government regulation and concern for the environment is bringing changes to the building industry, says Mary McDonough, vice-president of strategy and brand development at Empire Communities.
“It will force the industry towards intensification in general.”
That means fewer traditional family homes on 40-foot-wide lots and more high-rise condominiums and low-rise townhouse complexes.
Greenfield development of farmland is giving way to “grey-field” building on top of parking lots and strip mall sites.
Ms. McDonough notes that economists differ in their opinions of how high the price of oil will go and over what period of time. Recently, financial markets mayhem sent the price of a barrel of oil below $100 (U.S.) again, while the price of gas at the pump was driven up when hurricane Ike blasted the U.S. South.
Longer term, economists expect the trajectory to be up.
“Certainly oil prices are going up over time — what’s under debate is the timeline,” says Ms. McDonough.
Economists cannot forecast how heavily the higher costs of commuting will weigh on consumers and whether future home buyers will make different choices about where to live as a result.
Looking out as far as 2012, Ms. McDonough believes developers will continue to feel constrained by scarce land and the escalating price for new housing.
Empire currently offers a pretty even split between low-rise houses and mid-to-high-rise buildings within a low-rise site, she says. Ms. McDonough expects to see Empire — and its competitors — pack new homes in more densely in the future.
Because land is already restricted in the GTA, developers are looking beyond for land in Kitchener-Waterloo, Grimsby, Stoney Creek and Bowmanville, she points out. She adds that builders will have to collaborate with municipalities.
“We’re looking at how we can add density on land and make an affordable home.”
Ms. McDonough expects that Empire will build more houses that fit somewhere between a traditional detached and a high-rise condo.
Stacked townhouses, for example, allow for more density but they still give the homeowner his or her own front door and back garden.
On the drawing board now, she says, are concepts for houses with more green space surrounding them, such as townhouses fronting onto a park.
Empire is also looking at new designs that increase privacy when houses are positioned more closely together.
Most sophisticated developers are constantly convening focus groups and commissioning market surveys says Stephen Dupuis, chief executive officer of Building Industry and Land Development Association (BILD).
“There’s just too much risk in the real estate business” for developers to build homes that are not what people want to buy.
He says builders have “certainly seen the writing on the regulatory wall” when it comes to density.
The 40-foot lot with a detached house on it is already a rare breed, he says.
“I think that’s the public perception of what gets built in the ‘burbs.” In reality, he says, builders are already erecting more semi-detached houses and town homes.
Last year, for the first time ever, builders sold more condos than single-family houses.
“I never thought I’d see the day — nobody thought they would see the day.”
Benjamin Tal, senior economist at CIBC World Markets, says consumers have already shown that they are willing to trade in their large vehicles for small when the price of gas spikes, but whether they will trade houses remains to be seen.
“It’s much easier to buy a smaller car than to sell your house in the suburbs.”
Mr. Tal believes the rise of the middle class in China and India reflects a mega-cycle that will eventually spell the end of the era of cheap oil.
While weaker global growth may hold back oil prices in the next year or two, CIBC says, Mr. Tal warns that Canada has not spent enough to develop its transportation infrastructure, as Europe has.
At the same time, there is a risk that builders could over-build if they don’t pay attention to demographics. If housing starts remain at current levels, house prices could fall dramatically as baby boomers retire, he cautions. But Mr. Tal says that housing starts need only be cut by 10 to 15 per cent to keep that gloomy scenario from happening.
“It’s just assuming that builders will keep building,” he says. “At this point I am willing to give them the benefit of the doubt.”
Hugh Heron, president of Heathwood Homes, points out that home building has always been a cyclical business.
The Canadian market is currently being weighed down by the downturn in the market in the United States, he says.
Mr. Heron, who has been working in the building industry in Canada since 1967, says he’s seen all of the economic woes before.
“Our industry is always fraught with problems — there’s nothing clean and clear about our marketplace.”
Mr. Heron has long been a builder of suburban homes, but he expects condominiums on a subway route to be extremely strong.
Meanwhile, the provincial growth plan, which places limits on greenfield development, has made land for building more expensive.
“What happens is prices go up because it’s a scarce commodity.”
Mr. Heron points to some municipalities which are aiming for 40 per cent growth within existing boundaries but not increasing their transportation networks quickly enough to deal with the population growth.
“They’d better be careful.”
At the moment, Mr. Heron has acquired land in Durham Region, east of Toronto.
He points out that developers do not decide how land will be developed - that’s up to the various levels of government.
Heathwood submits a proposal recommending a mix of detached, semi-detached and row houses, then waits for a response from the municipality.
“All we do is react to the marketplace.”
Mr. Haggart at Daniels notes that his company has been building high-rise condominiums in downtown Toronto and Mississauga for decades.
More rivals have crowded into that market in recent years and he only expects the competition to intensify.
Mr. Haggart says the company uses demographics, trends in the marketplace and economic forecasts in deciding where and what to build. Daniels also tries to stay ahead of buyers’ desires by holding gatherings for purchasers and figuring out which strategies are successful.
“We as owners of the company ask, ‘Why did you buy? What did we do right?”
About 10 years ago, Daniels got very serious about seniors housing as a result of its research on demographics. Communities in Markham, Erin Mills, Bayview-Sheppard and Vaughan, for example, are designed to provide an easy transition from one high rise tower to another as baby boomers age and their needs change.
Daniels has been courted by municipalities outside of the GTA and the company has done some looking around at other areas but mainly Daniels remains cautious about moving into areas beyond the greenbelt.
“We’re more set up like a building company than someone sitting on land for a long time.”
He also thinks people buying in areas such as Erin Mills still prefer a detached house or townhouse and are not ready for high-rise condos.
Daniels’ strategy is to keep building units that draw first-time buyers and seniors, he says.
Berkshire Homes president Laurie Gordon has differentiated her company from rivals by building smaller enclaves of houses in existing towns instead of developing new mega-projects.
“We have a market niche.”
Many of the new communities are within walking distance of an existing downtown. It’s a concept that appeals to empty nesters and downsizers, Berkshire says.
Ms. Gordon also likes to find locations that sit beside ravines, rivers and green space.
In Bolton, for example, Berkshire has built 13 bungalows on a private road with no through traffic. The houses overlook conservation lands.
In Thornbury, Berkshire has built 27 houses near a mill pond which offers kayaking and canoeing.
One of the challenges Ms. Gordon faces is the time-consuming business of receiving regulatory approval. She says she faces just as much paperwork and as many meetings as the developers undertaking massive sub-divisions.
“It’s the same process — that’s why builders prefer to do 1,300 instead of 13.”
Ms. Gordon believes there is a market for houses that offer low maintenance but easy access to small town Ontario and the countryside. She adds that builders need to adapt to changes in customer demands.
Just as the automotive industry has built hybrid vehicles, she believes home builders can offer a mix of infill, low-rise and energy efficient.
“Perhaps we can’t bring down the cost of the house but we can bring down the cost of operating the house.”
Developers and builders, she says, have to change direction with the market.
“Not everybody has a crystal ball,” she says. “You have to look at the business as a long-term business.”
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